CUNA Regulatory Comment Call

May 28, 2008

Fed Proposal for Overdraft Protection Plans

EXECUTIVE SUMMARY

The Federal Reserve Board (Fed) has issued a proposal to amend Regulation DD, the Truth in Savings Act (TISA), to require additional disclosures about account terms and costs associated with overdraft protection plans.

Although credit unions will not be subject to the Fed's proposal, TISA requires the National Credit Union Administration (NCUA) to issue a substantially similar rule, and we expect NCUA to do so shortly after the Fed finalizes this proposal.

The Fed's proposal is intended to complement and be consistent with the proposal that has also been issued recently by NCUA, the Fed, and the Office of Thrift Supervision (OTS) that addresses unfair and deceptive practices as they pertain to credit cards and overdraft protection plans. These rules are expected to be finalized by the end of this year, and financial institutions will be given additional time to implement these changes.

The Regulation DD proposal will require financial institutions to:

Disclose on the periodic statement the dollar amounts charged for overdraft fees and returned item fees, both for the month and the year-to-date. Currently, only institutions that promote or advertise the payment of overdrafts are required to provide these disclosures.

Provide account balance information through an automated system that discloses only the amount of funds available for withdrawal, without including the additional funds that would be available under an overdraft program.

Comments on this proposal will be due by July 18, 2008. Comments are due to CUNA by July 9, 2008. If commenting directly to the Fed, you must refer to Docket No. R-1315.

Please feel free to fax your responses to CUNA at 202-638-7052; e-mail them to Senior Vice President and Deputy General Counsel Mary Dunn at
mdunn@cuna.coop and to Senior Assistant General Counsel Jeff Bloch at
jbloch@cuna.coop; or mail them to Mary and Jeff in c/o CUNA's Regulatory Advocacy Department, 601 Pennsylvania Avenue, NW, South Building, Suite 600, Washington, DC 20004-2601. You may also contact us at 800-356-9655,
ext. 6732, if you would like a copy of the proposed changes, or you may access them on the Internet at the following address:

BACKGROUND

TISA requires financial institutions to disclose yields, fees, and other terms concerning deposit accounts to consumers at account opening, upon request, when changes in terms occur, and on periodic statements. There are also rules prohibiting inaccurate or misleading advertisements. The Fed's Regulation DD implements TISA, and credit unions are covered under substantially similar rules that are issued by NCUA.

This proposal is intended to complement and be consistent with the proposal issued recently by NCUA, the Fed, and the OTS that addresses unfair and deceptive practices as they pertain to credit cards and overdraft protection plans. As required under TISA, NCUA will later issue rules that will be substantially similar to the final version of this proposal. This proposal also includes changes to the official staff commentary, which accompanies Regulation DD and provides guidance on implementing the provisions of these rules.

DESCRIPTION OF THE PROPOSED RULE AND CHANGES TO THE OFFICIAL STAFF COMMENTARY

Opt-Out Disclosure Requirements for Overdraft Services

The unfair and deceptive practices proposal that was recently issued will require financial institutions to provide consumers with a reasonable opportunity to "opt-out" of an overdraft protection plan. The opt-out notice must be provided both before a fee is charged for the first time and during each periodic statement cycle in which a fee is assessed, if the consumer does not choose to opt-out.

This proposal outlines the content and timing requirements for providing this notice. As part of this proposal, the Fed has also issued a sample form that may be used to comply with these requirements.

Here is the information that must be disclosed in the notice:

The fees, including any daily fees.

The categories of transactions in which the overdraft fee may be imposed, such as checks, ATM withdrawals, and point-of-sale debit card transactions. That overdraft fees could be charged in connection with an overdraft as low as $1, or the lowest amount in which the institution would charge a fee.

Any daily limits on the amount of fees that may be charged, in addition to any limits for the statement period. If applicable, the institution must also disclose that there is no daily or statement period limit.

An explanation of the right to opt-out, including the methods that may be used to exercise this right, such as a toll-free telephone number or allowing the consumer to send the opt-out request by mail.

A statement that there may be other credit products available for the payment of overdrafts, if the institution offers them. This may include transfers from other accounts, overdraft lines of credit, or transfers from a credit card. These specific alternatives do not have to be listed, except for the line of credit, if the institution offers this service.

The official staff commentary will allow institutions to describe the consequences of not opting out. For example, this may include information that the check will bounce, resulting in a fee if the check is returned, in addition to a fee assessed by the merchant.

A financial institution may not impose a fee for overdraft service until it provides the consumer with the opt-out notice and gives the consumer a reasonable opportunity to opt-out. This may be provided at the time the account is opened or at a later time when the service is offered to the consumer.

The opt-out notice must also be provided on each periodic statement in which an overdraft fee is assessed. Consumers would still need to pay the fee, assuming they received the initial notice and did not elect to opt-out. As an alternative to providing notice on periodic statements, the institution may send the consumer a separate notice after it pays an overdraft. Only one such notice would need to be sent within the periodic statement period, regardless of how many fees are assessed.

The initial opt-out notice that must be provided before fees are assessed would only apply to accounts that are opened after the effective date of the final rule. However, the requirement to provide subsequent notices after the account is overdrawn, either separately or on periodic statements, would apply to all accounts, including those existing as of the effective date of the final rule.

Disclosure of Costs of Overdraft Services on Periodic Statements

In 2005, both the Fed and NCUA amended Regulation DD to require financial institutions that promote the payment of overdrafts to disclose on the periodic statement the fees charged for overdraft services and the fees charged for returning items unpaid, both for the statement period and for the year-to-date. This proposal will expand these disclosure requirements to all financial institutions, regardless of whether they promote the payment of overdrafts. The disclosure must be made in a tabular format and be near the other itemized fees, as well as in close proximity to the opt-out notice on the periodic statement. The proposal includes sample forms for making this disclosure, which includes two alternatives that may be used.

Balance Inquiries

When responding to a consumer's inquiry regarding the available balance, the proposal will require financial institutions to disclose only the amount of funds available for the consumer's immediate use or withdrawal, which must not include any additional amounts available under an overdraft protection plan. This would apply to any automated system, such as an ATM (regardless of whether the institution owns the machine), Internet website, and telephone response system. The institution may disclose a second balance that would include the amount available under an overdraft protection plan, as long as it is prominently disclosed that this second balance includes additional amounts provided by the institution to cover overdrafts.

These provisions will not apply to inquiries in connection with in-person discussions, telephone discussions, or Internet chats with live personnel at the institution, out of recognition of the significant compliance burden that would be associated with monitoring these types of discussions. Although the first balance disclosed may not include amounts available under an overdraft plan, this balance may include checks that have not yet cleared, as well as funds held by the institution to satisfy a previous obligation of the consumer, such as a hold for a debit card transaction that has not yet been settled.

QUESTIONS TO CONSIDER REGARDING THE REGULATION DD PROPOSAL

(The Fed has specifically requested comment on the
issues raised in these questions.)

For the opt-out notice, should a form with a check-off box be included that consumers may mail in if they want to exercise their right to opt-out of the overdraft protection plan? Should consumers be permitted to opt-out electronically, provided they have agreed to the electronic delivery of the information?

Do the proposed content requirements for the opt-out notice provide consumers with sufficient information so they may evaluate effectively whether the overdraft protection plan meets their needs? What will be the burdens of providing these notices and the required information, such as the alternatives for consumers that may be available? What will be the benefits for consumers and will these benefits exceed the burdens for the financial institution?

Should the content requirements differ for notices that are provided after an overdraft fee has been charged to the account, such as on the periodic statement? For example, should certain content requirements not be required for these subsequent notices, such as information about alternative services? What will be the burden of providing the opt-out disclosure in close proximity to the fees on the periodic statement?

The proposal will require financial institutions to disclose on the periodic statement the fees charged for overdraft services and the fees charged for returning items unpaid, both for the statement period and for the year-to-date. Currently, only institutions that promote the payment of overdrafts are required to make these disclosures. What would be the compliance burdens associated with these expanded requirements? What would be the benefits for consumers and would this outweigh these burdens?